Indonesia is home to the most active Twitter city in the world (Jakarta) and five million Indonesians—a population the size of Singapore—are entering the urban consuming class each year.

Indonesia today is a dynamic nation marked by great opportunity. The country has had one of the most consistent growth rates among global economies over the past ten years, with annual GDP growth averaging almost 6 percent. It is also the world’s 16th largest economy, with GDP at USD 878 billion. While inflation has risen and there has been some volatility in the Indonesian stock market and currency, the country’s long-term fundamentals—favorable demographics, high private consumption, and rapid urbanization—remain positive.

Indonesia is expected to account for nearly 40 percent of ASEAN growth by 2030. Key factors driving growth include a young population—nearly 60 percent is below 30 years of age—and a population that is expanding at a rate of 2.9 million a year. The country is rapidly urbanizing, fueling a rise in incomes and the ability for consumers to increasingly spend on discretionary items. Furthermore, it is an economy that relies heavily on domestic consumption—already, Indonesia’s consumer spending, at 57 percent of GDP, is significantly higher than the corresponding figures for neighboring, largely export-driven nations such as China, Malaysia and Thailand.

On the current expected trajectory, an estimated 90 million Indonesians will join the ranks of the consuming class by 2030. Only China and India are likely to surpass this increase in the numbers of consumers in absolute terms. In parallel, the number of Indonesians shifting to urban areas is expected to reach 71 percent of the total population, or 209 million people, by 2030.

All of these factors underscore the potential of Indonesia’s consumer market. However Indonesia presents some significant challenges for companies seeking to capture the consumer opportunity, including its fragmented geography (spread across some 6,000 inhabited islands), size and diversity. Where do the opportunities exist? How do you navigate a vastly distributed population of almost 250 million people? What consumption trends should companies track as consumers’ attitudes continue to evolve? What products and marketing strategies will resonate with Indonesians’ tastes and preferences? With private consumption remaining a primary driver of the country’s growth, understanding the profiles, mindsets and behaviors of the country’s consumers is critical.

In 2013, McKinsey and Company undertook its second—and most comprehensive—consumer research study of more than 5,500 consumers across 44 cities and rural centers in Indonesia. This effort followed an initial study in 2011 that helped to identify consumer types, and their preferences for specific products, brands and retail channels. Given the country’s complexity, we wanted to use longitudinal data to understand consumption behaviors at a granular level and assess how trends are evolving. We examined a wide range of variables including demographics, household expenditure, brand preferences and retail channels, and also studied rural populations for the first time. We conducted face-to-face interviews with some 5,500 people across all socioeconomic groups and focused on five sectors—food and beverage, home and personal needs, financial services, consumer electronics and over-the-counter (OTC) pharmaceuticals.

The following report explores Indonesia’s consumption potential and discusses how businesses today can capture this opportunity. It offers insights on Indonesia’s consumers, identifies key market segments that are commercially attractive, adopts a cities lens to understand changing consumption patterns, and suggests relevant product and marketing strategies. It also examines evolving trends related to consumer channel preference, including the potential for growth in e-commerce and in product categories, and looks at how companies should be thinking ahead to benefit from underlying shifts in the market.

Four key findings are highlighted in the report:

1. The consuming class—55 million urban and 15 million rural Indonesians—are the most commercially attractive segment.

Indonesia’s population is young, growing and rapidly urbanizing, making it one of the fastest-growing consumer markets in the world. Our research of urban and rural populations found groups of consumers, totaling about 70 million, who are optimistic about their future and becoming increasingly sophisticated in their spending habits and product choices. Understanding the needs and emerging attitudes of this fast-growing consuming class will be critical as companies think about expanding their footprint in Indonesia.

There is also a significant rural consuming segment of 15 million, situated in rural city clusters near large urban centers. These consumers show attitudes similar to their urban counterparts.

2. Indonesian cites are at different levels of consumerism driven by the ability and propensity to consumer.

Between 2000 and 2013, Indonesia’s urban population increased from 42 percent to 55 percent or 138 million residents. By 2030, that share is expected to reach 71 percent or 209 million people. In turn, the contribution from urban Indonesia to GDP is also expected to grow from 74 percent in 2010 to 86 percent in 2030. In real terms, that’s an increase from USD 524 million to USD 1.7 billion. Indonesia’s urban centers will play a crucial role in driving its economy forward.

Our research goes a step further in redefining consumerism where we see the emergence of what we call five hidden gem cities in Indonesia. Despite their smaller population sizes, these cities show significant promise, exhibiting higher disposable incomes and enhanced consumption attitudes.

Traditional retail channels, including mom-and-pop stores (warungs) and wet markets, still dominate the retail landscape in Indonesia, but modern trade’s share continues to rise, led by the growth of convenience stores. The modern retail landscape remains increasingly fragmented as consumers rely on multiple channels — convenience stores, hypermarkets, supermarkets, department stores and others.

When it comes to digital platforms, Indonesians are among the highest users of social networking sites in the world. Commercial activities such as online shopping and online banking, by contrast, have low penetration. Consumers say they simply don't trust online shopping yet, and they worry about payment safety, lack of sales support and unreliable quality.

4. Indonesians strongly prefer and trust local brands, and the Consuming class is driving growth in new emerging categories.

Across most product categories, Indonesians are not only faithful to brands, but also show a strong preference for local brands. Seventy five percent of those surveyed, on average, said they already have a preferred brand in mind when they go into stores to buy home and personal care products; and more than two-thirds said the same for food and beverage items.

Consumers trust Indonesian companies, take pride in using local brands, and believe that local companies truly understand Indonesian consumers, providing better value for the money when compared with foreign brands. However, it is interesting to note that it is only the perception of being local that matters, and foreign companies have been able to successfully capture the market through localization or acquisition strategies.

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